Russia Repercussions

After worrying about ruble depreciation, price increases for CDS's, sanctions, oil prices, and defaults ... the list starts to expand to other countries. 

The problem is financial contagion. It's not happening yet, but it does happen, so ... now the worries are global liquidity, remittances, Russian domestic borrowing, and depth of involvement in Russian markets.

Bonds are straightforward to price, so they tend to be sold readily when investors need more liquidity. Russian bonds used to be fairly high on the list of what's available in quantity from developing countries where interest rates are often higher. So if people can't sell their Russian bonds as needed, they'll sell something else. We're beginning to see investors selling off more than the usual amounts of bonds (driving down their prices, and driving up their rates) in other large, emerging markets, including China, Indonesia, Mexico, and Thailand. Not a big worry yet. Higher CDS prices also indicate nervousness amongst investors in El Salvador, Ghana, and Tunisia.

Remittances are the shares of incomes that immigrants (permanent or temporary, legal or illegal) make in a higher-paying host country, which get sent home to families where the money goes further. People in rich, developed, countries tend not to know this, but these are often a major component of the GDP of small, poor, countries. The problem here is that Russia is one of those host countries. So sanctions are going to start hitting countries like Tajikistan, Uzbekistan, Armenia, and Georgia in fairly short order. That risk gets amplified if those countries in turn have debts requiring interest payments in euros or dollars.

The bonds I've discussed so far are international borrowing. But, like other countries, the government of Russia also sells bonds inside the country (nicknamed OFZ's). These are often used for managing cash flows and liquidity. Here's the thing: if they're bonds, even if you sell them locally, anyone internationally can buy them from a reseller. Russia has already sort'of defaulted on these. Interest payments on them that were due this month were paid on time to Russian holders. But no payments went out to foreign holders. Everyone is wondering why these have not been declared to be in default yet. But the expectation is that at some point they will be. Russia's quasi-default in 1998, which in part led to Putin succeeding Yeltsin, involved Russia honoring its international bond payments, but defaulting on its domestic ones (which probably made Russians leery of financing their government, which then went more international over the last 15 years).

Lastly, there's the general problem of outstanding investments in Russia. The sovereign debt (the part borrowed by the government) of Russia is about $60B, of which a third require interest payments in euros or dollars (we just dealt with $4.5B of that yesterday). But private Russian firms have borrowed about $250B from western investors, and those firms often have little latitude to make their interest payments (some are already defaulting, but they're all small). The biggest exposure is in France, Italy, and Austria. Those are the place that will get wobbly with sanctions first.